The Bank of N.T. Butterfield & Son Ltd. Q3 FY2025 earnings call

• Strong third quarter results supported by solid net interest income, disciplined capital management, and stable balance sheet. Delivered higher noninterest revenue and improved efficiency.
• Butterfield is a leading offshore bank and wealth manager with franchise-level market shares in Bermuda and Cayman Islands, and growing retail banking in Channel Islands. Offers full suite of services from trust to asset management.
• Bermuda's business stable with international business expansion, government forecast budget surplus; Cayman Islands GDP expected to increase 2.5% in 2025, financial services and tourism key pillars.
• Net interest income before provision for credit losses improved by $3.3 million. Noninterest income increased due to higher banking fees and foreign exchange revenues. Core noninterest expenses decreased.
• Balance sheet remains liquid and conservatively positioned; asset quality very strong with low credit risk in investment portfolio, stable loan and mortgage portfolios.

In the third quarter, Butterfield reported net income of $61.1 million and core net income of $63.3 million. Core earnings per share were $1.51 with a core return on average tangible common equity of 25.5%. The net interest margin was 2.73%, an increase of 9 basis points from the prior quarter, with the cost of deposits falling 9 basis points to 147 basis points. Net interest income before provision for credit losses was $92.7 million, an improvement of $3.3 million or 3.7% from the prior quarter. Noninterest income totaled $61.2 million, an increase of $4.2 million over the last quarter. Bermuda's business environment was stable with international business expansion and a growing local economy; the Cayman Islands saw steady population and financial services growth with a 2.5% GDP increase expected in 2025, with financial services and tourism representing approximately 50% and 35% of GDP, respectively.

• Margin trajectory: Deposit side has room, about $10B of interest-earning deposits; investment securities have $1B of assets to reprice over 12 months; loans have $400M resetting over next 12 months. Outlook for NIM relatively stable, maybe expanding with asset repricing tailwind.
• Expect NIM to be relatively stable, possibly expanding as asset repricing provides tailwind.

Today's call contains forward-looking statements subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these risks can be found in SEC filings.

Q: Curious how you think about the margin trajectory as we look forward, with factors like Fed cuts, repricing tailwind, and lagging impact on deposits.

A: Michael Schrum said deposit costs came down this quarter, with about $10B of interest-earning deposits, investment securities have $1B reprice over 12 months, loans have $400M resetting, and outlook for NIM relatively stable, maybe expanding with asset repricing tailwind.

Q: In the Trust and Asset Management business, how do you think about crypto or stablecoins? Is that something on your radar?

A: Michael Collins said they are slow followers, watching closely, not getting much client pressure, and would piggyback off correspondent banks like Bank of New York in this sector.

Q: Just curious what other expense initiatives are on the horizon and how you think about expenses going forward and ability to drive positive operating leverage.

A: Michael Schrum said they moved back office to Halifax, had early retirement, consolidated back office space, and expect to continue moving back-office functions to Halifax, with a $90 million run rate estimate for near to medium term.

Q: Could you provide more commentary on what drove the pretty significant upside in banking here quarter-over-quarter and year-over-year, and if there are nonrecurring revenues in there.

A: Michael Schrum said banking was strong due to uptick in volumes, including card services fees and tourism-related fees, with FX revenues also driven by client rebalancing.

Q: Which jurisdictions are you expecting to be driving the most growth from a loan and deposit perspective over the next year or so, and what are some of the loan categories with most opportunity.

A: Michael Schrum said Bermuda has seen deposit growth, Cayman may have seasonal deposit increase in Q4, and Jody Feldman said they are not a loan growth story, but seeing slight pickup in loan pipeline in Cayman and Bermuda due to macro backdrop, but are conservative with underwriting.